Fortunately, you don't have to pay private mortgage insurance, or PMI, forever. Once you build up at least 20 percent equity in your home, you can ask your lender to cancel this insurance.
If you're paying for PMI, that cost won't stay with you forever. Once you've reached 20 percent equity — either through paying down your loan balance over time or through rising home values — you can contact your loan servicer about removing PMI from your mortgage.
You can avoid paying for private mortgage insurance, or PMI, by making at least a 20% down payment on a conventional home loan. Private mortgage insurance, or PMI, is insurance coverage that protects the lender in case a borrower defaults on a home loan.
You can remove PMI from your monthly payment after your home reaches 20% in equity, either by requesting its cancellation or refinancing the loan.
To remove PMI, or private mortgage insurance, you must have at least 20% equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home's original appraised value. When the balance drops to 78%, the mortgage servicer is required to eliminate PMI.
“In order to get your private mortgage insurance removed, you may need to be on the loan for a minimum of 12 months,” shares Helali. “After you've been on the loan for one year, the lender should automatically dissolve the PMI when you have 22% equity in the home.”
To get rid of your PMI, you would need to have built at least 20% equity in the home. This means that you have to bring down the balance of your mortgage to 80% of its initial value (home initial purchase price). At this stage, you may request that your lender cancel your PMI.
Getting rid of PMI is fairly straightforward: Once you accrue 20 percent equity in your home, either by making payments to reach that level or by increasing your home's value, you can request to have PMI removed.
Private mortgage insurance does nothing for you
This is a premium designed to protect the lender of the home loan, not you as a homeowner. Unlike the principal of your loan, your PMI payment doesn't go into building equity in your home.
Pay Down Your Mortgage
One way to get rid of PMI is to simply take the purchase price of the home and multiply it by 80%. Then pay your mortgage down to that amount. So if you paid $250,000 for the home, 80% of that value is $200,000. Once you pay the loan down to $200,000, you can have the PMI removed.
PMI is designed to protect the lender in case you default on your mortgage, meaning you don't personally get any benefit from having to pay it. So putting more than 20% down allows you to avoid paying PMI, lowering your overall monthly mortgage costs with no downside.
Pros of a 20% down payment
Lower monthly mortgage payments are the biggest perk of putting 20% down. When you make a larger down payment, you have a smaller loan amount This means a lower monthly payment and less mortgage interest paid over the long haul.
Does PMI decrease over time? No, PMI does not decrease over time. However, if you have a conventional mortgage, you'll be able to cancel PMI once your mortgage balance is equal to 80% of your home's value at the time of purchase.
For homeowners with a conventional mortgage loan, you may be able to get rid of PMI with a new appraisal if your home value has risen enough to put you over 20 percent equity. However, some loan servicers will re–evaluate PMI based only on the original appraisal.
Requesting a Refund
A refund of an upfront mortgage insurance premium (MIP) payment can be requested through HUD's Single Family Insurance Operations Division (SFIOD). On the FHA Connection, go to the Upfront Premium Collection menu and select Request a Refund in the Pay Upfront Premium section.
Some mortgage costs can increase at closing, but others can't. It is illegal for lenders to deliberately underestimate the costs on your Loan Estimate. However, lenders are allowed to change some costs under certain circumstances. If your interest rate is not locked, it can change at any time.
Lender-paid PMI is not refundable. The benefit of lender-paid PMI, despite the higher interest rate, is that your monthly payment could still be lower than making monthly PMI payments. That way, you could qualify to borrow more.
Credit scores and PMI rates are linked
Insurers use your credit score, and other factors, to set that percentage. A borrower on the lowest end of the qualifying credit score range pays the most. “Typically, the mortgage insurance premium rate increases as a credit score decreases,” Guarino says.
The tax deduction for PMI was set to expire in the 2020 tax year, but recently, legislation passed The Consolidated Appropriations Act, 2021 effectively extending your ability to claim PMI tax deductions for the 2021 tax period. In short, yes, PMI tax is deductible for 2021.
Besides getting a lower rate, refinancing might also let you get rid of PMI if the new loan balance will be less than 80% of the home's value. But refinancing will require paying closing costs, which can include myriad fees. You'll want to make sure refinancing won't cost you more than you'll save.
Conventional loans do not require mortgage insurance if the borrower holds 20% equity (the difference between the amount of money you owe and what your home is worth). So, if you currently have 20% equity in your home, you may be able to refinance your FHA loan into a conventional one and remove the mortgage insurance.
Paying off a mortgage early could be wise for some. ... Eliminating your PMI will reduce your monthly payments, giving you an immediate return on your investment. Homeowners can then apply the extra savings back towards the principal of the mortgage loan, ultimately paying off their mortgage even faster.
When it comes to calculating mortgage insurance or PMI, lenders use the “Purchase price or appraised value, whichever is less” guideline. Thus, using a purchase price of $200,000 and $210,000 appraised value, the PMI rate will be based on the lower purchase price.
It's nearly impossible to make that kind of return in the stock market, retirement account, or another financial instrument. PMI, then, can be viewed as an investment – a very sound one – and not a waste of money.